When does the market need to be informed of a takeover approach for a listed company?
An interesting question and one that traders will be asking themselves on Monday, after troubled banknote printer De La Rue finally confessed to a bid approach.
From the RNS:
De La Rue plc notes the recent press speculation and confirms that it has received a highly preliminary and opportunistic approach.
There is no certainty that this highly preliminary approach will lead to an offer.
A further announcement will be made as and when appropriate.
We say finally because last week rumours of a bid for De La Rue, which has been rocked by production errors at one of its factories, were swirling the market, driving its share price up 14 per cent on Tuesday and Wednesday:
In case you are wondering, the bidder it is Oberthur Technologies — a privately-owned French rival, according to Mark Kleinman of Sky News who claims a £750m (760p-a share) cash offer was made in the past couple of weeks:
The company which prints sterling banknotes and the next generation of British passports could be about to fall into French hands, I can exclusively reveal.
De La Rue, the troubled currency printer, has received a secret takeover bid from Oberthur Technologies, a privately-owned French rival.
The all-cash offer valued De La Rue at about £750m and was made in the last few weeks, I am told. It was rejected on the grounds that it undervalued De La Rue, which has seen its share price slump this year amid a production crisis which has shaken customers’ confidence in the company and cost its chief executive, James Hussey, his job.
Oberthur is now understood to be considering its next move and may decide to increase its offer.
Presumably De La Rue and its advisers will argue that because Oberthur’s approach was preliminary, conditional, opportunistic and unlikely to lead to a formal offer, it did not need to inform the market when the French company first made contact.
But is that really satisfactory in view of the credibility of the bidder, the mooted offer price and the share price volatility which has continued again this morning?
We think not.
So what is a crisis-hit banknote printer involved in the production of more than 150 currencies worth?
According to a Merrill Lynch buy note, which De La Rue’s PR advisers Brunswick helpfully circulated to journalists last week, as much as 830 pence a share:
Risk/reward still skewed to the upside Further uncertainty over the paper business was probably anticipated at 1H, banknote volumes -30% was not. There are three likely outcomes for the paper business, in our view, and the risk / reward remains skewed to the upside, even in the bearish scenario. Importantly, in all three we assume that banknote printing has not been affected by the problems in paper production and volumes recover in 2012-13E, in line with management assurances.
Bull case: Business as usual Customer X resuming trading with De La Rue at similar volume and pricing levels, would result in our 2012-13E EPS rising 23% and 15% and the dividend increasing by 25% from base case levels. In this scenario, fair value is 830p.
But writing this morning, Panmure Gordon analyst Paul Jones reckons a 750-800p a share price is a more realistic takeover price, given the possibility that De La Rue’s largest client — rumoured to be the Reserve Bank of India — will terminate its contract with the company because of the aforementioned printing problems:
We have suspected for some time that any interest in De La Rue would only come from a competitor given the problems any private equity firm would face in due diligence given the nature of the business, and despite the market position and scarcity of the asset we believe it unlikely this will become a bidding war. The accuracy of reports on 750-800p needs as always to be taken with a pinch of salt until confirmed, though a material premium to this – in our opinion – looks unlikely given the recent trading update.
At 800p, De La Rue would trade on over 10.5x recent peak earnings (to March 2010), earnings we have serious doubts could be replicated in the short to medium term. On current forecasts this multiple would rise to 35.7x to March 2011, dropping to 28.2x – a more than generous valuation given the unquantifiable risk of reputational damage as its current order book unwinds and new contracts come up for negotiation. We see little possibility that there will be anything but margin pressure, and that there remains a more than decent chance of its largest client terminating its current contract given the length of time negotiations over production problems have been under way
As for Oberthur, analysts note that given the level of synergies that could be achieved through combining two similar businesses with high levels of fixed costs, there’s every chance it could return with a higher offer.
Whether the board of De La Rue, which seems wedded to independence and is scrambling to find a new chief executive, would be prepared to listen is another matter. They are probably still dreaming about the time the shares traded over £10.
Update: 9.45am (GMT).
It seems De La Rue management want at least 900p a share to recommend a bid, according to this note from Investec, which is being circulated by the company’s advisers.
De La Rue (DLAR.L, Hold, TP under review) – statement confirm bid talks Statement out confirming it has received a highly preliminary and opportunistic approach. ‘There is no certainty that this highly preliminary approach will lead to an offer’. Press is speculating it is Oberthur (private, french competitor) at 800p. 800p would be an historic March 2010 PER of only 10.6x (this was peak earnings). While the short term quality problems are material De La Rue has a very strong market position, in a market that has little spare capacity, to produce an obviously valuable product. We would, hence, expect a materially higher bid to be necessary to secure support. 900p would be a March 2010 PER of 11.9x, 1000p would be 13.2x.
Of course, whether the business is worth 900p all depends on whether you think the paper production issues have permanently damaged the business and its reputation with central banks round the world.
De La Rue’s biggest shareholders, via Bloomberg.
Related link:
De La Rue shares soar after £750m Oberthur approach – FT
De La Rue: licensed to kill money - FT Alphaville